If you are like most people, you have heard of cryptocurrency, but you don’t understand it or don’t know why so many people are investing literally trillions of dollars in it.
This new form of commerce can be summarized in two basic tenets: Lack of trust in the world’s current banking system and a desire to get rich quick. Think of the excitement about cryptocurrency in relation to the 1849 California and 1890s Yukon goldrushes.
In those goldrushes, thousands of young men (and a few women) journeyed to California and the Yukon to strike it rich. Most never found gold and returned home, sadder and poorer, but wiser if they had any sense. Those who struck it rich, besides a few lucky ones who actually found gold, were those who provided the tools and equipment, food, and other necessities required to mine the gold. In the California Gold Rush, entrepreneurs like Levi Strauss created pants that held up under difficult conditions, and the company continues today as a multi-billion-dollar company.
The same will be true today with cryptocurrency.
First, the history: The move to cryptocurrencies began after the 2008 financial meltdown. The COVID-19 pandemic has accelerated that shift. And the world has not recovered from these events.
Many people have lost trust in the world’s banking system and have turned to cryptocurrencies as a more trustworthy means of carrying on business. It’s not just banks that lost credibility but also the governments that were supposed to regulate and govern those banks and failed miserably. A quote from Antonia Colibasanu’s “New Political Strategies in a New Economy”: “Enter cryptocurrencies. The viability of cryptos is still very much an open question, but the fact that they have been embraced as they have, illustrates a loss of faith in traditional institutions.”
We need to define some terms from Merriam-Webster:
Cryptocurrency: “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.”
Non-Fungible Tokens (NFTs): “a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it).”
Blockchains: “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.”
The big concern about cryptocurrencies is the security of the transactions. In brief, people get together, make deals and transfer funds. Providing those safeguards requires a great deal of computational calculations and high energy consumption.
Those who get involved with cryptocurrency should have a high level of computer savvy, be able to afford the software, and have a wariness about scams to earn coins. The whole process is called “mining”, making my reference to the goldrushes appropriate. Like the goldrushes, there are few laws or rules. Cryptocurrency is the Wild West of investing.
Cryptocurrency is a threat to current currencies. As a result, China has banned them, while the Biden administration has sought to regulate and control them to protect consumers and also to maintain the dollar’s supremacy in the world’s financial system.
Currently, about 40 million Americans have invested in cryptocurrencies, surpassing $3 trillion dollars in exchanges.
Like the goldrushes of the 19th century, risks are big and so are rewards for the few. Wealth will flow to those who built the currency infrastructure and who are savvy and technically gifted enough to deal with the needs of those willing to risk their fortunes. These individuals will be the ultimate winners. For most, rewards of crypto mining will be few and losses great.
The reason for the rise of cryptocurrencies all gets down to lack of trust in our current banking system and greed that motivates most investors.
For those interested in a more detailed analysis of cryptocurrencies, attend my Green River College Prime Time course on April 26 at the Auburn Center campus north of Fred Meyer from 9 to 11 a.m.